Definition of Gross Profit & Gross Margin, operating profit & Operating margin and net profit & net margin

Suppose that you are conducting small & medium or even large type of business. One thing you have to understand clearly what is called Gross Profit & Gross Margin, operating profit & Operating margin and net profit & net margin otherwise everything worthless. So, let us see here all of the definitions to eradicate of the confusions:

  

Definition of Gross profit: The gross profit or operating profit means revenues or sales minus COGS (Cost of Goods Sold). If this number shall be divided by sales then it is called Gross margin. This illustrates as bellow: 

Sales – COGS (Cost of Goods Sold) = Gross Profit

Gross Profit * 100/ Sales = Gross Margin   

Here, Gross margin shows how profitable is the business prior to subtracting ITD (= Interest taxes & deprecation expenses) R & D (Research and development expenses), SGA (Selling, General and Administrative expenses) etc. 

As you saw all definitions are very simple and easy to read but you have to be very careful about understanding and applying figures during the accounting calculations. 

Operating Profit and Operating Margin: As I mentioned above about Gross profit that Gross profit does not includes other expenses which incurred by the organization itself that related to the organizations sold items like ITD, R & D and SG&A etc. At the time of subscripting R & D and SGAs from Gross Profit, gets operating profit. That operating profit divided by sales is called operating margin (It is term of % percentage). The formula illustrates bellow: 

Gross Profit – SGA – R & D = Operating Profit

Operating Profit * 100/Sales = Operating Margin   

Net Profit and Net Margin: As we know more or less all the companies wants to make money from business. Net Profit is vital here. Net Profits we may denote as Net Income, Net Earning, or merely Earnings. We may understand Net Profit (NP) as how much profit an organization produced during a fiscal year after subtracting its all expenses or it may call quarterly, half yearly etc. In terms of quarterly and half yearly Net profit will shows partially. The Net Profits formula is as follows:

Sales – COGS – SG&A – R&D – ITD = Net Profit  

 [Where COGS= Cost of goods sold, SG & A = Selling, General and Administrative expenses, R & D = Research and development expenses, ITD = Interest taxes & deprecation expenses respectively]

If a organization’s net profit grows, investors, shareholders looking for receiving its dividends. If organization do not pays this net profits amount then they preserved in to the retained earnings for further investment or future uses etc. As we described about Net Profit now let’s see what about Net margin or net profit margin: 

Net Profit * 100/Sales = Net/Profit Margin

From my practical experiences I saw peoples always look for a highest profit margins company to invest as a shareholders rather than lowest profit generating organizations. Have a more profit in business!